Wednesday, May 14, 2008

Where to draw the line

In my post on screening I explained the concept in brief, but did not get very deep into some of the complications of the subject.

In the case of negative screening, for instance, figuring out where to draw the line can be a difficult task. What constitutes a threshold you are unwilling to cross? A majority of a firm’s sales? It’s profits? Gas stations and drug stores are good examples here. While sales may be primarily in gasoline or prescriptions, profits can derive mainly from other products - the sale of alcohol, tobacco and lottery tickets, for example.

Regardless, though, you will still have to ask yourself how much sales or profit is too much? Is over 50 percent too high a threshold? Are there issues on which you are personally more passionate or concerned about? The production of arms versus the production of tobacco, for instance? These are all tough questions, and they are one reason niche funds are being developed that focus on particular sets of investor goals. It’s also why considering SRI should involve a great deal of thought and prayer.

Similar caveats apply in the case of positive screening. Are you willing to overlook certain practices you might not fully support in order to support a broader goal or a particularly positive initiative or direction a company is taking?

The fact is that it is unlikely you will find very many funds or even companies that align with all of your principles, and restricting your pool of investments can increase your exposure to risk. Many SRI funds were heavily invested in health care and tech firms in the 90s, for instance, and took a hit when those sectors declined.

I'll address the question of risk more fully in a later post, but it points to the difficulty in fully extricating oneself from what one perceives to be morally suspect in the world and the importance of recognizing the value of engagement in spite of this reality.

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